How to Buy Property in Bulgaria, the Safe Way
The most common mistakes when buying real estate in Bulgaria. Explanation and practical tips.
The most common mistakes made when buying a property in Bulgaria can be summarized as:
- Paying a deposit to reserve a property.
- The seller insists that a lower price is put on the title deed (tax evasion).
- Feeling that you are the weak party when you are the market maker.
- Not having a look at the preliminary contract before paying the deposit.
- Not contacting a real-estate lawyer in Bulgaria.
Paying a deposit to reserve a property:
A common practice when buying a property in Bulgaria is to pay a deposit to the broker to reserve the selected property. Do not sign a deposit agreement, preliminary contract or pay deposit before your lawyer performs due diligence of the real estate. If you intend to buy a property in Bulgaria, you ought to consult a real-estate lawyer first. Paying a deposit can be binding even if you haven’t signed any agreement with the real-estate broker. The reasons to refuse to pay a deposit are numerous:
- The deposit is paid to the broker, and the broker is bound to reserve the property for you. However, the seller has no obligation to reserve the property for you. You have no agreement with the seller and the seller may sell the property to another buyer. Most properties are advertised through several real-estate brokers. Should you pay deposit to all these brokers?
- The deposit can be better considered as a guaranteed commission for an incomplete deal for the broker. Deposits are non-refundable, unless there are any exceptional faults of the broker or seller. Deposit agreements are made to ensure that the brokers’ efforts are paid even if the sale does not happen. You might think the deposit will be left to the seller, but in most cases, the deposit remains for the broker. We can assist you to renegotiate the preliminary agreement to ensure your rights and interests are protected at the highest standards.
- Deposits are determined on the sale price, not on the lower price stated in the sale contract. Some sellers will insist on putting a lower price on the contract to save tax. However, they ask you to pay 10% deposit on the sale price. If you decide to pay a deposit, you have to negotiate a deposit determined on the price stated on the sale contract or a deposit of maximum 3% as what the broker could get if the property is sold (usually, the brokers’ commission for Sofia and Plovdiv is 3%). You may also think twice about paying 3% broker’s commission on the sale price and not on the lower sale price stated in the sale contract.
- You should not pay a deposit before you know the legal standing of the property. Brokers advertise properties before any due diligence is performed. Even if the due diligence were performed before advertising the particular property, its standing may change in the course of dealing. You pay 10% deposit, you sign a preliminary contract and later, you find out that there are legal impediments to the transfer of the property. To avoid falling in such brokers’ traps, you should always do due diligence of the property before paying a deposit.
- Due diligence should be performed before paying a deposit or signing a preliminary contract. The due diligence can be used as your advantage to negotiate a lower price, for example. Performing due diligence after the deposit is paid and preliminary contract signed causes you to weaken your market power.
- Finally, if you decide to pay a deposit, you have to clearly state your terms as under what conditions the deposit to be refunded. For example, if the seller does not prepare the required documentation for completing the sale or if the sale is not completed by a particular date, you should be refunded within a week. Article 93 of the Contracts and Obligations Act states that the deposit should be refunded at double the amount if the seller does not sell the property.
- You have to ask the broker if the sale price includes VAT at the beginning of your dealings. You may consider the property is a great deal and you pay the deposit instantly. After paying the deposit, the broker lets you know that 20% VAT should be added. The deal is no longer great and you have to ask your deposit to be refunded as soon as possible. This is another reason why you have to authorize a Bulgarian real estate lawyer to perform the property checks before you proceed.
- You should also be aware of the garage scam. Initially, brokers will tell you there is a parking space or garage available. After paying the deposit, the broker will tell you that the garage is at an extra price of 20,000 Euros. A supposedly great, discounted deal turns out to be quite expensive. Unfortunately, there is no way to know if the garage is really included in the sale price till you appoint a Bulgarian property lawyer who will check the title deed.
Our lawyers can also assist you to buy a property in Bulgaria as an asset of your company. You will need first to set up a company in Bulgaria.
The seller insists that a lower price is put on the title deed (tax evasion):
This almost certainly means that the seller is trying to evade tax payment. The offer may sound tempting to buyers, as in most cases the buyers pay notary fees and transfer tax, which are calculated as the percentage of the price put on the title deed. The lower the price stated on the deed, the lower the transaction expenses for the buyer. However, in case the contract is broken (for example, due to encumbrances) the buyer shall be obliged to give back the property to the seller, but the seller shall be obliged to give back the price as per title deed. If there is a difference between the price put on the deed and the actual price paid, the seller cannot be chased to give back the balance. Brokers will not tell you this.
If a lower price is put on the deed and you decide to resell the property shortly afterwards, there will be a larger capital gains tax due. Brokers will not tell you this, either. Also, it might look shady for future buyers as to why you paid 50,000 Euros (according to the title deed) and are now asking for a price of 100,000 Euros (the actual price you paid to acquire the property).
Find more information about the procedure for buying a property in Bulgaria.
Feeling that you are the weak party in the transaction:
Buyers have to realize that they are the stronger party in property transactions. You have to realize that you are the market makers. Brokers will try different marketing and selling tactics to close the deal quickly, in most cases against your best interests. You should not fall for this. Quick decisions are usually wrong decisions when it comes to buying a property in Bulgaria. You should always keep the below in mind:
- The sale price and broker’s commission are negotiable.
- All terms in the preliminary contract are negotiable.
- Paying a deposit weakens your market power. After the deposit is paid, it is highly unlikely to negotiate more favouring terms and better price.
NB: Without you, the buyers, there will be no property market and brokers!
Not having a look at the preliminary contract before paying the deposit:
The preliminary contract is the most important document when purchasing a property in Bulgaria. You have to carefully read the preliminary contract, or better, appoint a Bulgarian real estate lawyer to do this for you. Preliminary contracts can be confusing and it is wise to get an experienced lawyer who ultimately understands the Bulgarian Real Estate Law.
- Most real-estate brokers have introduced clauses that the sale price should be transferred to the broker’s account instead to seller’s account. You should never agree to this, as the common practice requires the buyer to pay, by bank transfer, directly to the seller. Alternatively, the buyer can transfer the sale price to the lawyer’s escrow account, who later pays it to the seller.
Perhaps the broker has agreed a lower price with the seller, but a higher price is advertised online. The broker gets the difference plus commissions from the seller as well as the buyer. That’s not fair!
- All property purchases go through a notary public in Bulgaria and the buyer has to choose the notary who will finalize the transaction. Brokers will insist to make the choice on your behalf as they have established excellent practice with a particular notary. There are several reasons why you should prefer choosing the notary.
Find more information about legal fees for buying a property in Bulgaria.
Not contacting a real-estate lawyer in Bulgaria:
A good real estate lawyer in Bulgaria will do the following for you:
- Proper due diligence of the property
- Negotiate better terms
- Draft the deposit agreement, preliminary contract and brokerage agreement
- Draft the new title deed saving you notary taxes
Should you appoint us to be your property lawyer in Bulgaria, we will do much more than the above. We are not real-estate brokers and we have no interest to make you buy a property in Bulgaria if there are legal irregularities or if we are putting your investment at risk.
This article was written due to numerous requests from our clients who wanted to make potential buyers aware about the pitfalls of buying property in Bulgaria.
Summary – When You Buy a Real Estate in Bulgaria:
- Do not pay a deposit before due diligence is performed!
- Do not sign the preliminary contract before you consult a real-estate lawyer!
- Do not fall into brokers’ aggressive marketing & selling tactics!
For assistance to buy a real estate in Bulgaria, please do not hesitate to contact our dedicated team of Bulgarian real eslate laywers.